The Global Pinch in Household Income

If it feels like your family expenses are rising, but your income hasn’t gone up very much, you’re not alone. Some American families are feeling the pressure of tighter budgets, but it’s far less than families in many countries.

According to new research from global consulting firm, McKinsey & Co., some two in three households (540-580 million people) are making due with lower or stagnant incomes in 2014 compared to 2005. This is a big leap from 1993 to 2005, when less than 2 percent of households (or fewer than 10 million people) were worse off. Lower taxes and government transfers (i.e., welfare) can help mitigate the impact, but for a quarter of households worldwide, the income they live on has stalled or fallen over the past decade.

Young, less-educated people are especially negatively affected, adding to the evidence of a generation that is worse off and growing up poorer than their parents.

The United States is not nearly as bad off as other countries. According to this analysis, less than two percent of American households experienced flat or falling disposable incomes after taxes and transfers (though what those transfers to the overall economy and, indeed, to the long term prospects of recipients is another matter). Compare that to 100 percent of Italian households and 60 percent of British households.

A key factor in how well people are doing is the tax rate–lower tax rates play a big role in creating opportunity as the report explains:

The encouraging news is that it is possible to reduce the number of people not advancing. Labor-market practices can make a difference, as can government taxes and transfers… In the United States, lower tax rates and higher transfers turned a decline in market incomes for four-fifths of income segments into an increase in disposable income for nearly all households. Efforts such as these—along with additional measures such as encouraging business leaders to adopt long-term thinking—can make a real difference.

While the report pushed for “bold action” on the part of governments, it underplays the role of fundamental changes in the job market that contribute to stagnant wage growth. The economy is shifting and the labor market is changing rapidly. Low-income, less educated workers will continue to fall behind as the low-skilled jobs are increasingly replaced by automation. As NPR reports, it will be hard for these workers to catch up:

And here’s the big problem for many workers in this recovery: “Robots and computers have automated tasks that once required workers,” McKinsey said. “Demand for low- and medium-skill workers has been lower than for high-skill workers,” it concluded.

So even when orders rebound for companies, the jobs don’t come back. That puts downward pressure on wages. In this country, young workers in the lower third of educational attainment saw wages fall on average by 15 percent between 2002 and 2012.

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But here’s a finding that also stands out: Affluent Americans are flourishing.

McKinsey says in this country, upper income households saw rising wages as more and more jobs opened up for people with higher skill sets…

Incomes are rising if you happen to work in information technology, accounting, engineering and other high-demand fields, she said. But for low-skilled workers, automation is replacing labor and causing a wage downdraft, [Lindsey Piegza, chief economist at Stifel Fixed Income in Chicago] added.

American households won’t benefit in the long-run from Band-Aid solutions like arbitrary minimum wage hikes for low-skilled, less-educated workers. We need to rethink how we prepare young people in high school to find employment in the evolving economy. Whether they go to college, pursue a trade, or start their own business, they have to have the skills that can’t be replicated by a robot. Otherwise, in a few years it won’t matter what the minimum wage is if they still can’t find a job for their level of skill and education.